Are you stalled on a home buy for lower rate? It's time to act

Wait no more. People who have been waiting for mortgage rates to drop a little more before shopping for a new house or condominium can stop waiting. After a month-and-a-half in which mortgage rates have declined every week, experts say rates could still go down some more, though not enough to pass up a dream house, should you come across one now.

To add to the good news, these same experts don't see mortgage rates going up very much in the near future, either.

``If one starts to look now and finds a house in the next few weeks, it's likely rates will be a little lower then than they are now,'' says Thomas Lawlor, an economist with the Federal National Mortgage Association (``Fannie Mae''). ``And the risk of higher rates is fairly small.''

``My guess is interest rates will continue to edge down a bit throughout the summer,'' agrees John McConnell, a professor of finance at Purdue University. Dr. McConnell is also on the board of directors of the Federal Home Loan Bank Board for the district that includes Indiana and Michigan. The board includes the presidents of 14 savings-and-loans in those states.

The average rate on 30-year fixed-rate mortgages was 13.02 percent in the week that ended May 10, according to the Federal Home Loan Mortgage Corporation. That's down from about 13.25 a month ago and about 13.75 a year ago. In many parts of the country, however, it's not hard for a good rate shopper to find a fixed-rate mortgage for slightly under 13 percent, perhaps around 12.75 percent.

At the same time, however, rates on adjustable mortgages have gone up slightly. Depending on the location and the exact variety of ARM, rates on these mortgages are running about 11.7 percent. The narrowing difference between fixed- and adjustable-rate mortgages means more people are opting for the fixed, even though their monthly payments -- in the beginning, at least -- are higher. Last summer, Mr. Lawlor says, ARMs accounted for about two-thirds of all mortgages. Now, they make up less than half the total.

If mortgage rates decline more than a percentage point or so, this could have another, unexpected effect, says George H. Lentz, a lecturer at the Indiana University School of Business. As lower rates encourage more home shopping, prices of homes could rise, perhaps enough to offset some of the benefit of lower interest rates, he says. He does not think rates are that low now, but they could be, possibly by sometime in the summer, which would make now a better time to start shopping than August.

For some who already have mortgages and do not plan to move, lower rates raise the possibility of refinancing. For these people, escaping the burden of a 17 or 18 percent fixed rate, the prospect of a new mortgage with a lower rate -- and lower monthly payments -- is very tempting.

Almost 23 percent of the mortgages closed in February were refinancings, says a spokeswoman for the Mortgage Bankers Association of America. While some are refinancing out of high fixed-rate mortgages, others are moving out of adjustable-rate mortgages that come with no limits, or caps on payment increases. Since these were written, the public has become educated about the value of caps, and the marketplace has produced a variety of capped adjustable mortgages. A typical one woud permit maximum increases of two percentage points a year with a maximum, or lifetime, cap of five points.

The main difference between mortgages is in the index used to make the adjustments, if any, says Jay Q. Butler, a professor of real estate at Arizona State University. There is a variety of indexes, but many lenders use a 12-month Treasury-bill rate; another common one is based on the bank's overall cost of funds, which tends to be less volatile. With some lenders, you can pick which index will be used.

But refinancing is not simply a matter of going to your old bank and trading one mortgage for another. For one thing, your bank probably doesn't own it anymore; banks have more money to lend because they have sold most of their mortgages on the secondary market, where investors are happy to put up money backed by the low risk of homeowner mortgage payments. This means you'll have to take out a whole new mortgage, which will mean new closing costs and mortgage origination fees, or points.

To make these extra costs worthwhile, Dr. Lentz says, the new mortgage should be more than two percentage points lower than the old one. ``If you've got a 15 percent mortgage and the new rate is 13 or 131/2 percent, then I'd say no.'' Other experts say they would prefer to see at least three points taken off the original rate, but individual situations differ, depending in part on the lender and on how long you'll be staying in the house after refinancing.

One thing keeping many people from refinancing is a prepayment penalty. This usually amounts to about six months' interest and could tack a few thousand dollars onto the cost of changing mortgages. Prepayment penalties are generally barred in Alabama, Alaska, Illinois, Iowa, Maryland, Minnesota, New Jersey, New Mexico, Pennsylvania, Texas, Vermont, and West Virginia. They are also prohibited on mortgages of less than $100,000 in North and South Carolina.

Just because the state you live in permits prepayment penalties, it doesn't mean all the banks there have them. When shopping for a mortgage, try to find a lender that doesn't use these penalties and waives them for refinancing at the same institution.

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